Higher minimum wage equals higher prices, more taxes

April 9, 2016

Updated 12:00 a.m.

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Nathan Howard, 20, poses last month outside the McDonald's he works at in Rancho Cordova. Howard, who said he makes $10.25 an hour, says he would benefit from state's rising minimum wage, but opponents of the bill say it will further harm California's already poor business climate. RICH PEDRONCELLI, ASSOCIATED PRESS

Nathan Howard, 20, poses last month outside the McDonald's he works at in Rancho Cordova. Howard, who said he makes $10.25 an hour, says he would benefit from state's rising minimum wage, but opponents of the bill say it will further harm California's already poor business climate. RICH PEDRONCELLI, ASSOCIATED PRESS

I have dinner once a week with some friends here in Orange County. I set a limit of $20 for beer and food, or $80 a month. When the state minimum wage jumped to $10 an hour from $8 a couple years back, the restaurants increased their prices. So I cut back from a full meal to appetizers. It’s less enjoyment, but, as President John F. Kennedy said, “Life is unfair.”

I’ll have to make further adjustments as California’s minimum wage will rise again, to $15 an hour by 2022. The Register reported that, once the full increase to $15 hits, about 605,000 Orange County workers will get raises, a third of the workforce. Gov. Jerry Brown, who signed the new law, and California legislators who passed it, seem not to care that most folks in the state live on limited incomes. When prices go up, purchases go down.

That also happens to those who will “benefit” from the minimum wage increase, Raymond Sfeir told me; he’s a professor of economics and management science at Chapman University. “The increase in costs will erode the increase in the incomes those paid the minimum wage will get,” he said.

The increase probably won’t kill many jobs in Orange County and the rest of California, he said. It’s hard to haul a restaurant or surf shop to low-tax South Dakota. But the creation of some new jobs here “no longer will be undertaken.” Companies will expand in other states or countries. Or new companies just won’t be formed at all because the costs will be too high.

“No doubt those with higher minimum wages will have less overtime,” Sfeir added. Moreover, the higher wage will push up the wages of those already making $15 or more an hour. Sfeir said they will ask, “Why can’t I also get a raise?”

A manager currently making $15 an hour could end up making no more than his employees. But why put up with the headaches and risks of management if there’s no extra pay involved? So the pay inflation will run up the salary ladder, with the higher costs passed on to customers.

He brought up other increases: Higher pay means more taxes taken out by government at all levels. The employer part of the Social Security-Medicare tax is 7.65 percent. And according to a July 2015 report by the Workers’ Compensation Insurance Rating Bureau, the average workers’ comp cost to California employers is 3.07 percent. Add the two, and we get 10.72 percent. Which comes to another 54 cents on that $5.

So the cost to the employer of the $5 jump in the minimum wage really is $5.54.

Companies adjust. Sfeir pointed out that in Seattle, San Francisco and other areas already implementing minimum-wage boosts, restaurants have substituted a 20 percent service charge for tips. The money sometimes doesn’t even make it to the waiters and waitresses, but is kept by the employer.

People especially hit by the higher wage will be retirees in such areas as Laguna Woods and Leisure World, state Sen. John Moorlach told me. The Republican from Costa Mesa voted against the increase.

“We have a growing population in the 65-and-older category who haven’t been getting many increases in their Social Security,” he said. According to the Social Security website, the compounded cost-of-living adjustments from 2009-15 add up to just 8.8 percent. Given current low inflation, it’ll likely be something like that during the next 7 years – as the minimum wage rises 50 percent, or more than five times as much.

“How do they get their lawns mowed, or enjoy their occasional restaurant senior meal?” Moorlach asked.

He added that, in arguing against the $15 minimum wage on the floor of the state Senate, he brought up likely increases in underground economic activity. If you hire someone outside the official government system to put up your sidewall or fix your plumbing, you not only avoid paying the $15 minimum wage, you don’t have to pay the taxes and workers’ comp, either. That’s for otherwise-legal occupations.

Then there are illegal activities. ABC/TV 10 in Sacramento reported, “Poachers steal an estimated $100 million worth of wild animals and fish every year in the state. Many of the thieves are repeat offenders, according to California Fish and Wildlife officials.” The higher minimum wage will boost the cost of legal fishing, making poaching even more tempting.

And let’s not forget the $3.6 billion a year in additional costs the state government itself will have to pay for its own workers making higher minimum wage, as the Legislature itself calculated. Will that be paid for by cutting government or raising taxes? You don’t have to be an economist to know the answer.

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